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The Deterrence Effect of a Penalty for Environmental Violation

Author

Listed:
  • Yun Wang

    (School of Economics and Management, Dalian University of Technology, Dalian 116024, China)

  • Yanxi Li

    (School of Economics and Management, Dalian University of Technology, Dalian 116024, China)

  • Zhuang Ma

    (School of Accounting, Hangzhou Dianzi University, Hangzhou 310018, China)

  • Jinbo Song

    (School of Economics and Management, Dalian University of Technology, Dalian 116024, China)

Abstract

The response to the penalty for an environmental violation on the firm level is a matter of reactive corporate environmental practices, about which the existence of a penalty is critical for environmental public policy. We propose that a penalty acts as a deterrence signal to enhance the perceived threat of legal punishment and the peer effect serves as the path through which peer firms learn from target firms. Based on the peer effect among firms and the deterrence effect in criminal economics, we investigated whether and how the peer firm responds to the penalty for environmental violation of target firms in the same industrial sector. Using samples of Chinese listed firms from 2008 to 2015, this paper finds that the penalty for the target firms can increase the peer firms’ environmental investment, and compared to the sample with low-level environmental regulation, the increase in the sample with high-level environmental regulation is more significant. These findings suggest that a penalty for target firms has a deterrence effect on peer firms and the environmental regulation strengthens the above deterrence effect. This is expected to help both theorists and practitioners achieve a better understanding of the implementation of a penalty for an environmental violation.

Suggested Citation

  • Yun Wang & Yanxi Li & Zhuang Ma & Jinbo Song, 2019. "The Deterrence Effect of a Penalty for Environmental Violation," Sustainability, MDPI, vol. 11(15), pages 1-19, August.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:15:p:4226-:d:254852
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    References listed on IDEAS

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    2. Fan, Di & Yeung, Andy C.L. & Yiu, Daphne W. & Lo, Chris K.Y., 2022. "Safety regulation enforcement and production safety: The role of penalties and voluntary safety management systems," International Journal of Production Economics, Elsevier, vol. 248(C).
    3. Ruiqian Li & Ramakrishnan Ramanathan & Guanghua Xu, 2023. "The impact of penalties for environmental violations on corporate environmental responsibility," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(3), pages 1343-1363, June.
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    7. Chunhua Xin & Xiaolu Hao & Lu Cheng, 2022. "Do Environmental Administrative Penalties Affect Audit Fees? Results from Multiple Econometric Models," Sustainability, MDPI, vol. 14(7), pages 1-25, April.
    8. Dejan Glavas & Gilles Grolleau & Naoufel Mzoughi, 2023. "Greening the greenwashers – How to push greenwashers towards more sustainable trajectories," Post-Print hal-03908838, HAL.
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